New Opportunity in the Permian: Ways to Play the Wolfcamp Shale

by: Michael Filloon

The Permian Basin oil field is in west Texas and southeastern New Mexico. This deposit is quite large as it is about 250 miles wide and 300 miles long. Within the Permian are several shale areas you may have heard of but the Wolfcamp Shale is one being focused on here. This is located below the Spraberry formation which is a different oil field within the Permian. This area has been designated several different names-- for information's sake it is referred to as:

Wolfcamp Shale
Wolfberry Trend
Wolfcamp Trend
Wolfcamp Formation
Wolfcamp Oil Play
Wolfcamp Oil Shale
Wolfcamp Oil Field

All of these terms refer to basically the same area. I was a bit confused when first reading about this area, but it seems I am not the only one. In this article I will refer to it as the Wolfcamp. Recent advances in drilling technologies have led to the development of the Wolfcamp Shale. There is a ton of activity here, as there has been in the Niobrara, Bakken, Eagle Ford and Granite Wash. Spraberry Field is in the immediate vicinity of the Wolfcamp Shale. This field has been drilled since 1950's. In trying to estimate how much oil is in the Wolfcamp shale is difficult at best, but Spraberry Field had over 10 billion barrels, if we are to compare the two. Since development is happening fast at Wolfcamp, we should know soon what the recoverable reserves are.

There are several players in Wolfcamp. The first to identify is Chesapeake (NYSE:CHK). Chesapeake recently participated in its oil land grab, so you will see this company in many of the major shale plays. It seems it is / was acquiring Bakken acres too, but that is a story for a different time. Chesapeake has really thrown itself into getting oily. This company looks to have a mountain to climb as it converts to liquids from gas. I would watch it closely as Chesapeake seemed to do a lot of things right when gas was hot, we will see if the company can do it again.

Chesapeake currently has 560000 acres in the Permian, of that it has 290000 acres in unconventional shale areas. In its shale assets, Chesapeake has already completed 100 wells. The interesting situation with respect to the Permian Basin is that Chesapeake has not sought a JV. It may still do this, or is talking to companies now, but Chesapeake has generally grabbed land and after finding resources through the drill bit or seismic it will initiate a buy in from a company like CNOOC (NYSE:CEO). Chesapeake has stated it is concentrating cap ex on liquids, and I would guess it is doing the same here. Although this is not one of my favorite oil plays, Chesapeake can probably be bought here as the company is well above its 50 day moving average. Trading has been a little inconsistent as of late, but that is true for the entire space. It looks as though this stock still has a bullish chart, be wary of a drop below $30 a share.

Wolfcamp is also home to EOG Resources (NYSE:EOG). EOG has transformed its business like Chesapeake, and is getting oily. I highlighted this name in an article on February 7th. EOG has very good properties throughout the United States, and seems to be developing its acreage quickly. It has 120000 acres in Wolfcamp, and the company has stated approximately 78% of these wells will be liquids. EOG has completed four wells here, and it plans on running 3 rigs in 2011. The company has stated that it has potential reserves of 40 million barrels of oil equivalent net after royalty.

EOG has completed 4 wells and have drilled 8. The company has a very interesting leasehold here, and perhaps this company is the one to indicate how this shale will do as a whole. EOG's chart is a little iffy here, it has had a nice pullback and seems to have bounced up off of the 50 day moving average. I really like EOG going forward. Being a very large company, it should outperform the competition. The type of growth it is estimated to do this year ( 267.5%) is astonishing for a company this size (26.86 billion).

If you want a company levered to the Permian, Pioneer Natural Resources (NYSE:PXD) is your company. This $11 billion company generates 25% of its worldwide production at Spraberry, which is also 50% of its proved reserves. To date, Pioneer has interests in 5600 active wells here. Spraberry is the 15th largest gas field in the United States and the 5th largest oil field. The exciting part of this is the oil field is still growing. The reason for all of the talk about Spraberry is that Pioneer just has to drill deeper to add 30 MBoe to Spraberry well EURs. Most recent updates to horizontals being performed here are 2 Wolfcamp wells in Midland County. These wells are 4000 foot laterals, with 15 stages. The first well was drilled into middle Wolfcamp carbonate section. The second well was drilled into the lower Wolfcamp shale. This is what makes this area so profitable-- at different depths there are different resources. This company didn't bounce real hard off of its 50 day moving average, so watch this one to see what it does. The chart has held, although not really convincingly.

Devon Energy (NYSE:DVN) has been very aggressive in the Permian. Devon has 160000 net acres at Wolfberry, with 6 rigs running. Devon believes the EUR for each well here will be around 100 to 150 MBoe. Drilling costs are very low here at $1.6 to $2.2 million. Overall in the Permian, Devon has approximately 1 million acres. 73% of production is liquids. Overall in the Permian 20% production growth for 2011 has been targeted. The chart on Devon looks pretty good as it looks like many other charts in this sector. Going forward, Devon's growth estimates are a bit tepid. 2011 has negative growth projected by the analysts and 25% growth for next year. On the upside, it has beat the street 4 quarters in a row.

Linn Energy (LINN) has recently acquired $434 million worth of properties, which gained the company access to the Williston Basin and added bolt on acreage in the Permian. One of the best things about Wolfcamp is the play is lower risk than some other areas. Currently Linn has 400 locations in Wolfcamp, over 43000 net acres. Linn states it can add further locations in this vicinity and will do so if drilling programs go well. Wolfcamp has long life, low risked reserves, with 59 MMBoe proved. 74% of this play is in liquids and has a 20 year reserve life. 130 wells are planned in Wolfcamp in 2011 on a 5 rig active program. With this purchase, Linn now has 102000 net acres in the Permian. This is now 19% of its total reserves. I do like the Bakken and Wolfcamp purchases here, but I can't help but wonder if this wasn't a bit of a stretch. Linn seems a bit late to the game, and in turn is having to pay top dollar for prime acreages.

SandRidge Energy (NYSE:SD) is one of T. Boone Pickens' top holdings. The interest in this stock has skyrocketed over the past month. I gave an overview of this stock on February 24th here. SandRidge has extensive acreage in the Permian. This company is focused on conventional assets in the Permian, which is a bit different from what other companies are interested in, but it does decrease costs substantially. 16 rigs are operating in the Permian, with 811 wells going to be drilled in 2011. SandRidge is getting oilier every day. The Permian is a huge part of this. It has 243000 net acres in the Permian and 19000 of this is Wolfcamp, which is currently being marketed for sale.

Wolfcamp has 1700 Boe per day. SandRidge continues to be one of my favorite stocks for 2011. The company has very large acreage with proven oil reserves, and it got those acres cheap. Estimates for this company are through the roof, with 90.9% growth this year and 114.3% next.

Cimarex Energy (NYSE:XEC) has a fairly large company footing in the Permian at 30% of reserves, and 30% of 4th quarter of 2010 production. In 2010, it drilled 74 net wells here, and plans to drill 140 net in 2011. 12 rigs are currently running in the Permian and Cimarex has stated it will increase this number to 15 or 16 by mid-2011. Cimarex has 125000 net acres throughout the Permian. In Wolfcamp alone, Cimarex drilled and completed 7 wells. These wells were 50% gas, 32% natural gas liquids and 18% oil. Wolfcamp wells average about $6.5 to $7 million in cost and they are generally 4000 foot laterals. This company trades at a reasonable PE of 16 and a forward PE of 13.

Whiting Petroleum (NYSE:WLL) has purchased some 84304 gross or 71736 net acres in the Permian, which includes Wolfcamp and Bone Spring. It is running 1 rig here and will drill 4 wells and 5 re-entries. The average price per acre is $491 per acre. Proved reserves in the Permian are 115.6 MMBbl of oil and 47.9Bcf of gas. 94% of the proven reserves here are oil. Average daily net production was 12.2 MBOE/d, which is 18% of Whiting's total. The Permian will receive $92 million of cap ex to fund the drilling of 46 net wells. This accounts for 7% of Whiting's total 2011 exploration and development budget. Although Whiting is a Bakken story (and a good one at that), it has significant reserves in the Permian, with a green EOR project. I do like Whiting as the company seems to have the ability to adapt to any play it is in. It has decent growth with very nice assets. To see Whiting's other prospects click here.

Outside of Wolfcamp there are several other companies in the Permian with significant assets. Apache Corp (NYSE:APA) has been present in the Permian for over 20 years. It has more than 11000 wells here. These assets increased substantially when Apache purchased BP's (NYSE:BP) and Mariner's assets. The combination of buying these two assets has created the need for the Permian to become a standalone section of Apache.

In 2010, Apache was very successful in horizontal drilling. Although 2010 was a big year with respect to acquisitions and increased exposure to the Permian, 2011 is the year in which the company is starting to cultivate those assets. Twice as much cap ex is going to the Permian ($930 million), with 23 rigs working this acreage. Capital assessments will be done quarterly to make sure that the Permian can get up and running this year. In the short term Apache's stock has dipped below the 50 day moving average, so I am a bit pessimistic until Apache can roll higher. Apache trades at a little over 9 times forward earnings, and although this is quite inexpensive for a company that has analyst estimates predicting 2011 to see 22.2% earnings growth, there are better names in the oil space than Apache.

Range Resources (NYSE:RRC) has approximately 105000 net acres in Permian assets. 118 net locations are thought to be possible on this acreage. It is very early for the Permian assets with respect to Range. Range's current forward PE ratio is 34.4. It has beat earnings three out of the last four quarters. This company also has good estimated earnings. In 2011 it is expected to grow earnings 75%, and 43.9% in 2012.

There hasn't been a whole lot of press with respect to Samson Oil and Gas (NYSEMKT:SSN) and the Permian, but they have interests here. With respect to the State GC Oil and Gas Field in Lea County, New Mexico, Samson has interest in 2 wells here. Oil production rates are supposed to pick up in the first quarter of 2011, as a fracture stimulation is currently planned here.

SM Energy (NYSE:SM) has a 20 acre down spacing pilot in the Wolfberry tight oil program. Only 1 rig will operate here until information is received from pilot. Other parts of SM's acreage gets quite a bit more press. But SM has proven to be a very good company and will be able to increase production significantly if needed. Either way, look for SM to be plenty busy with other shale positions.

Exco Resources (NYSE:XCO) is an oil and gas company with acreage of 98000 net acres in the Permian. Its Permian production is 20 Mmcfe/d. Development of its Permian Canyon Sand Field is a priority. The Permian will be drilled with two rigs, and supported with $48 million of cap ex to drill and complete 72 gross wells. Exco is expecting a rate of return to be about 60%. Exco is an interesting company. It remains a natural gas company with very low cost production areas, combined with hedging to produce profits. Exco is trying to develop some liquids, and this may be a great place to start for them. Current estimated earnings growth has 10.9% in 2011 and it increases to 49.3% in 2012.

Concho Resources (NYSE:CXO) is very active in the Permian. The Permian core properties continue to drive growth for Concho. This company is focused on three Permian plays: Yeso, Delaware Basin
and Wolfberry.

Concho's oil focused drilling is opening new venues for the company to drill and complete. Concho is the most active well driller in the Permian. Currently it has 13 Wolfberry rigs, 13 New Mexico Shelf rigs, and 5 Bone Spring rigs. The 2011 capital budget is $1.1 billion. Of this 62% is going to the Shelf, 23% to the Texas Permian, and 15% to the Delaware Basin. This capital will pay for:

-Bone Spring drill 50 wells
-Lower Abo drill 13 wells
-Wolfberry drill 210 wells

The New Mexico Shelf is 62% of proved reserves for Concho. It is also 71% of production. Total drilling opportunities are 2897. The Texas Permian is 31% of proved reserves. 24% of total production comes from here. Of the 1800 drilling opportunities in the Permian, 1742 are in Wolfberry. The Delaware Basin is 7% of proven reserves, with approximately 150000 net acres in this location. There are 1101 drilling opportunities here and most of them are in Bone Spring and the Avalon Shale. The Delaware Basin could have significant upside. I believe that Concho could be a good buy here, as the company has many locations with opportunities. Concho's 2011 estimated earnings growth is 43/2% and 2012 estimated earnings growth is 40.7%. if these targets are hit, this company is relatively inexpensive.

Although Brigham (BEXP) is generally thought of as a Bakken play, this company currently has leaseholds in the Permian. Brigham is in the Wolfberry and Vicksburg areas. One well operated by Brigham has come in at about a 100 barrels a day, meeting expectations. Read here for more on Brigham's Bakken/Three Forks holdings.

El Paso (EP) won the bid at an auction for 123000 acres in the Wolfcamp. This University of Texas lease sale was done in the third quarter of last year. When this acreage was added to its current 12000 net acres, it turned into a sizeable project area. 3 wells are currently drilled at Wolfcamp, while 2 are being completed. The current 1 rig program at Wolfcamp is being increased to 2 to 4 rigs. El Paso is a very complex company as it is also a oil and gas pipeline operator.

Overall, it seems Wolfcamp is still in its very early stages, with only sporadic information out there as of yet. It is difficult to know if some of the lower shales are in very large reservoirs or are in choppy sections throughout the play. Either way, the Permian Basin as a whole is one of the top plays in the country, and with the newly found deeper shales, this will continue to be a great area of energy reserves.

Disclosure: I am long BEXP, SSN.

Additional disclosure: Valuations and estimates were taken from Yahoo Finance. This is a general list of names of stocks in the Permian and should not be thought of as a reason to buy any of the names. I would also add that I may add a position in SD,WLL, SM at any time in the near future.